A $1,000 face value corporate bond with a 6.75% coupon (paid semi annually) has
ID: 2706001 • Letter: A
Question
A $1,000 face value corporate bond with a 6.75% coupon (paid semi annually) has 10 years left to maturity. It had a credit rating of BB and a yield maturity of 8.2%. The firm recently became more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 7.1%. What will be the change in the bond's price in dollars and percentage terms?
This question is from "Financial Markets and Institutions- 5th ed." Page 212, problem 13.
I see the answer in the guided solutions on chegg but am still confused as to how they came to that answer. Any help is greatly appreciated.
Explanation / Answer
bond price for 8.2% yeild maturity = (0.0675/2)*1000*(1-(1+0.082/2)^-20)/(0.082/2) + 1000/(1+0.082/2)^20 =902.34
bond price for 7.1% yeild maturity = (0.0675/2)*1000*(1-(1+0.071/2)^-20)/(0.071/2) + 1000/(1+0.071/2)^20 = 975.24
change in price = 975.24-902.34 = 72.90
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